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Vol. 6, Iss. 3
March 22, 2017

The Most Overlooked Coverage Issue -- That’s Relevant In 45 States

When an insurance company is evaluating whether to file a declaratory judgment action or defend one filed against it, the principal issues under consideration are likely to be its chance of success and the amount of attorney’s fees that it will incur to achieve the desired result. But there is another factor that should also be included in the risk evaluation: possibly having to pay the policyholder’s attorney’s fees. I sometimes (a lot of times, in fact) see this consideration overlooked, or not given enough weight, in the calculus. After all, it is a potential factor in 45 states. In my experience this is the most overlooked coverage issue.

Despite our legal system’s bedrock principle, that the losing party is not obligated to pay the prevailing party’s attorney’s fees, insurance coverage litigation is an exception. In the vast majority of states -- almost all in fact -- the possibility exists, in some way, shape or form, that the insurer may be obligated to pay some, or all, of a successful policyholder’s attorney’s fees in addition to the amount of the claim.

One commonly cited rationale for this exception is that, if the insured must bear the expense of obtaining coverage from its insurer, it may be no better off financially than if it did not have the insurance policy in the first place. The specific approaches to this insurance exception vary widely by state and can have a significant impact on the likelihood of the insurer in fact incurring an obligation for its insured’s attorney’s fees.

Some states have enacted statutes that provide for a prevailing insured’s recovery of attorney’s fees in an action to secure coverage. Other states achieve similar results, but do so through common law. But whichever approach applies, the most important factor is the same: whether the prevailing insured’s right to recover attorney’s fees is automatic or must the insured prove that the insurer’s conduct was unreasonable or egregious in some way.

For example, a Hawaii statute mandates an award of attorney’s fees without regard to the insurer’s conduct in denying the claim. In other words, it imposes strict liability for attorney’s fees on an insurer that is ordered to pay a claim. Maryland also takes a strict liability approach, but it is the result of a decision from its highest court. A Virginia statute departs from strict liability and permits an award of attorney’s fees, but only if there was a finding that the insurer’s denial of coverage was not in good faith. Connecticut also rejects a strict liability rule, but it was established judicially and not legislatively. A handful of states use a combination of legislative and judicial avenues to address whether attorney’s fees are to be awarded to a prevailing insured. Under this hybrid approach, consideration is first given to the state’s general statute that allows for an award of attorney’s fees in an action on a contract. The court then interprets this statute, covering contracts in general, to include an insurance contract dispute. And some states address the issue by applying their general statutes permitting an award of attorney’s fees against a party that engages in frivolous or vexatious litigation.

While the mechanisms vary, in almost all cases an insurer that is unsuccessful in coverage litigation will either be automatically obligated to pay for its insured’s attorney’s fees or may be litigating post-trial whether such obligation exists. Whichever the case, the potential for being saddled with the attorney’s fees incurred by its prevailing insured in a declaratory judgment action is a consideration that insurers will usually not be able to avoid.

A recent decision from the Oregon Supreme Court demonstrates in stark terms how significant the attorney’s fees issue can be for an insurer that is unsuccessful in coverage litigation – and even if there’s no decision in the coverage case.

In Long v. Farmers Ins. Co., No. SC S063701 (Ore. Feb. 2, 2017), the Oregon Supreme Court addressed the state’s statute -- ORS 742.061(1) -- that creates the potential for an insured to recovery its attorney’s fees in coverage litigation. The statute provides as follows: “Except as otherwise provided in subsections (2) and (3) of this section, if settlement is not made within six months from the date proof of loss is filed with an insurer and an action is brought in any court of this state upon any policy of insurance of any kind or nature, and the plaintiff's recovery exceeds the amount of any tender made by the defendant in such action, a reasonable amount to be fixed by the court as attorney fees shall be taxed as part of the costs of the action and any appeal thereon.” (emphasis added by court)

The case is lengthy and I want to keep this short and simple.

The insured argued that, if you file an action on an insurance policy, and you later obtain more from the insurer – even if through the insurer simply voluntarily paying you more -- than the insurer tendered in the first six months after proof of loss, then you are entitled to recover attorney’s fees. In other words, the insured argued that “recovery” “refers to any kind of restoration of a loss, including a voluntary payment of a claim made after an action on an insurance policy has been filed.”

We are Farmers, bum ba dum bum bum bum bum, argued that “recovery,” as used in the statute, means a “money judgment in the action in which attorney fees are sought. Under that interpretation, attorney fees may be had for an insured’s action on a policy only if the insured obtains a money judgment that exceeds any tender made by the insurer within the first six months after the insured offers proof of loss.”

The court found for the insured, holding that “when an insured files an action against an insurer to recover sums owing on an insurance policy and the insurer subsequently pays the insured more than the amount of any tender made within six months from the insured’s proof of loss, the insured obtains a ‘recovery’ that entitles the insured to an award of reasonable attorney fees.” (my emphasis added).

In other words, as the court put it: “A declaration of coverage is not sufficient to make ORS 742.061 applicable; an insured must obtain a monetary recovery after filing an action, although that recovery need not be memorialized in a judgment.” (emphasis added by court).

Putting aside the court’s lengthy analysis, and numerous arguments back and forth between the parties, the court rested its decision on the purpose of the statute: “The purpose of ORS 742.061 is to discourage expensive and lengthy litigation. Requiring the insurer to pay the insured’s attorney fees if and only if the insured obtains more in the litigation than was timely tendered advances that purpose insofar as it encourages insurers to make reasonable and timely offers of settlement and also encourages insureds to accept reasonable offers and forego litigation. But the statute also serves a compensatory purpose. The statute ensures that, when insureds file suit to obtain what is due to them under their policies, they do not win the battle but lose the war by expending much or all of what they obtained in the litigation on attorney fees. . . . The function that a ‘recovery’ plays in that overall framework is to establish that the insured indeed obtained something in the action—payment of benefits due under the insurance policy that exceeded any amount that the insurer timely tendered. . . . It was [in the examples provided] the insurer’s payment, not the form of payment, that entitled the insured to attorney fees.”

On one hand, as Long v. Farmers addresses an Oregon statute, you could write the decision off as being limited to Oregon. However, I believe that the decision has the potential for wider reach. Given that the decision was tied to the rationale for allowing an insured to recover attorney’s fees – prevent the insured from winning the battle and losing the war; which is the same rationale used by many states -- other states may consider allowing an insured to do so, even if coverage was not obtained through judicial decree.


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